High-yield debt (Ofer Abarbanel Online Library)

A high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a term in finance for a bond that is rated below investment grade. These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors.

Risk
The holder of any debt is subject to interest rate risk and credit risk, inflationary risk, currency risk, duration risk, convexity risk, repayment of principal risk, streaming income risk, liquidity risk, default risk, maturity risk, reinvestment risk, market risk, political risk, and taxation adjustment risk. Interest rate risk refers to the risk of the market value of a bond changing due to changes in the structure or level of interest rates or credit spreads or risk premiums. The credit risk of a high-yield bond refers to the probability and probable loss upon a credit event (i.e., the obligor defaults on scheduled payments or files for bankruptcy, or the bond is restructured), or a credit quality change is issued by a rating agency including Fitch, Moody’s, or Standard & Poors.

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Cost of Capital (Ofer Abarbanel Online Library)

In Economics and Accounting, the cost of capital is the cost of a company’s funds (both debt and equity), or, from an investor’s point of view “the required rate of return on a portfolio company’s existing securities”.[1] It is used to evaluate new projects of a company. It is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.

Basic concept
For an investment to be worthwhile, the expected return on capital has to be higher than the cost of capital. Given a number of competing investment opportunities, investors are expected to put their capital to work in order to maximize the return. In other words, the cost of capital is the rate of return that capital could be expected to earn in the best alternative investment of equivalent risk; this is the opportunity cost of capital.

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Certificate of deposit (Ofer Abarbanel Online Library)

A certificate of deposit (CD) is a time deposit, a financial product commonly sold by banks, thrift institutions, and credit unions.  CDs are similar to savings accounts in that they are insured “money in the bank” and thus virtually risk free.  In the USA, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions. They differ from savings accounts in that the CD has a specific, fixed term (often one, three, or six months, or one to five years) and usually, a fixed interest rate. The bank intends that the customer hold the CD until maturity, at which time they can withdraw the money and accrued interest.

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Financial Capital (Ofer Abarbanel Online Library)

Financial capital is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provide their services to the sector of the economy upon which their operation is based, i.e. retail, corporate, investment banking, etc.

Three concepts of capital maintenance authorized in IFRS
Financial capital or just capital/equity in finance, accounting and economics, is internal retained earnings generated by the entity or funds provided by lenders (and investors) to businesses to purchase real capital equipment or services for producing new goods/services. Real capital or economic capital comprises physical goods that assist in the production of other goods and services, e.g. shovels for gravediggers, sewing machines for tailors, or machinery and tooling for factories.

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Collateralized loan obligations (Ofer Abarbanel Online Library)

Collateralized loan obligations (CLOs) are a form of securitization where payments from multiple middle sized and large business loans are pooled together and passed on to different classes of owners in various tranches. A CLO is a type of collateralized debt obligation.

Leveraging
Each class of owner may receive larger yields in exchange for being the first in line to risk losing money if the businesses fail to repay the loans that a CLO has purchased. The actual loans used are multimillion-dollar loans to either privately or publicly owned enterprises. Known as syndicated loans and originated by a lead bank with the intention of the majority of the loans being immediately “syndicated”, or sold, to the collateralized loan obligation owners.

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Valuation (Ofer Abarbanel Online Library)

In finance, valuation is the process of determining the present value (PV) of an asset. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., bonds issued by a company). Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability.

Valuation overview
Common terms for the value of an asset or liability are market value, fair value, and intrinsic value. The meanings of these terms differ. For instance, when an analyst believes a stock’s intrinsic value is greater (or less) than its market price, an analyst makes a “buy” (or “sell”) recommendation. Moreover, an asset’s intrinsic value may be subject to personal opinion and vary among analysts. The International Valuation Standards include definitions for common bases of value and generally accepted practice procedures for valuing assets of all types. Regardless, the valuation itself is done generally using one or more of the following approaches[1]; but see also, Outline of finance #Valuation:

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Asset-backed security (Ofer Abarbanel Online Library)

An asset-backed security (ABS) is a security whose income payments and hence value are derived from and collateralized (or “backed”) by a specified pool of underlying assets.  The pool of assets is typically a group of small and illiquid assets which are unable to be sold individually. Pooling the assets into financial instruments allows them to be sold to general investors, a process called securitization, and allows the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets. The pools of underlying assets can include common payments from credit cards, auto loans, and mortgage loans, to esoteric cash flows from aircraft leases, royalty payments and movie revenues.

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Stock (Ofer Abarbanel Online Library)

The stock (also capital stock) of a corporation is all of the shares into which ownership of the corporation is divided.[1] In American English, the shares are commonly known as “stocks”.[1] A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company’s earnings, proceeds from liquidation of assets (after discharge of all senior claims such as secured and unsecured debt),[2] or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

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Debt-to-income ratio (Ofer Abarbanel Online Library)

In the consumer mortgage industry, debt income ratio (often abbreviated DTI) is the percentage of a consumer’s monthly gross income that goes toward paying debts. (Speaking precisely, DTIs often cover more than just debts; they can include principal, taxes, fees, and insurance premiums as well. Nevertheless, the term is a set phrase that serves as a convenient, well-understood shorthand.) There are two main kinds of DTI, as discussed below..

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Debt (Ofer Abarbanel Online Library)

Debt is when something, usually money, is owed by one party, the borrower or debtor, to a second party, the lender or creditor. Debt is a deferred payment, or series of payments, that is owed in the future, which is what differentiates it from an immediate purchase. The debt may be owed by sovereign state or country, local government, company, or an individual. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest.[1] Loans, bonds, notes, and mortgages are all types of debt. The term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.[2] For example, in Western cultures, a person who has been helped by a second person is sometimes said to owe a “debt of gratitude” to the second person.

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